Personal contract purchase (PCP) finance agreements allow car buyers to spread the cost of a car across a deposit, monthly payments and an optional final payment. Typically a PCP finance agreement lasts for between 24 and 48 months, and unlike with a bank loan – where you pay the full price of the car over the contract – with PCP you only pay the depreciation.
In other words, the difference between the cash price and what the car is expected to be worth when your contract is up. A personal contract purchase agreement allows you to run a brand new car for an affordable monthly payment with the option to buy at the end or hand it back.
However, if you want to buy the car outright you simply have to make the optional final payment and then it’s yours. Alternatively, you could trade the car in for a new one, taking advantage of any equity – should the car be worth more than the optional final payment needed to buy it – as part of the deposit on a new model. Remember, though, that you won’t own the vehicle unless you make that optional final payment.
Don’t think this ties you to one dealer or manufacturer, though. If you’ve found a great finance offer at another dealer they can always pay the optional final payment to buy your car from the finance company, treating it like a part exchange – and you can still benefit from any equity.
How does it work?
PCP is pretty easy to wrap your head around. Choose your car, agree on a contract length and mileage limit, sort out the interest rates, pay a deposit (although no-deposit deals are out there), sign the papers, then take your new car home.
At the end of the contract you have a choice. Move on to your next car, or pay the optional final payment. If you pay this, you own the car.
This choice to keep the car or not sets it apart from PCH (Personal Contract Hire, often referred to as leasing) and Hire Purchase (HP) agreements.
There are also a number of discounts and offers available with PCP agreements, including large deposit contributions – where the manufacturer or dealer adds to the deposit, shrinking your monthly payments – meaning that this is often the finance option that provides the greatest value.
In contrast Hire Purchase schemes feature higher monthly bills than PCP – as the cost of the optional final payment is included in the monthly payments – and drivers own the vehicle outright at the end of the term.
Leasing meanwhile, doesn’t offer you the chance to buy the car, simply letting you rent it over the finance term. Remember though that there’s no chance to buy the car when the contract ends or to hand it back early.
The factors that determine your monthly payment
The amount you pay each month on a PCP deal is affected by a number of factors – and it’s not always a case of a higher list price meaning higher finance payments.
Depreciation
The higher the list price and the faster a car depreciates – that is, how quickly it drops in value – the greater your monthly payments will be. To ensure low payments look for cars that have a reasonably low list price and are still desirable at the end of the contract – meaning they should still be valuable at this stage – with a high optional final payment (also known as the balloon payment).
Deposit/deposit contribution
The more you put down, the less you’ll pay each month. Deposit contributions are available on many new car PCP schemes – this is a discount funded by the manufacturer and/or dealer. The greater the deposit contribution, the lower your monthly payments.
Contract length
The longer the contract, the less you’ll pay each month. However, you’ll also end up paying more interest, meaning you’ll face a higher bill overall – whether you’re handing the car back – or plan to buy it when the contract comes to an end.
Mileage limit
All PCP schemes feature a mileage limit. The lower this is, the lower your monthly payments.
Remember though, if you return the car the finance company can chase you for excess mileage charges. These could be as much as 30p per mile so be careful. Chalk up 1,000 miles too many each year on a three-year contract and that could leave you with a bill for £900.
Meanwhile, if you plan to buy the car, a lower annual mileage cap also increases the optional final payment – which could be up to half of the car’s list price, if not more in some cases – so it’s worth working out how you can pay this if you can’t be sure you’ll have enough cash to hand.
APR/interest charges
The lower the APR rate, the less interest you’ll pay. APR varies from 0% to around 7.9% for new cars, meaning that the difference between a good finance deal and a bad one could add thousands to the total amount you pay.
Go for an interest-free car deal with a deposit contribution and you’ll pay less than the list price overall to buy a car. But if you’re stuck with a 6.9% plan with no contribution you could end up paying more than a 20% premium over the list price in interest and other charges alone.
FAQs
Is PCP finance a good idea?
It certainly can be very beneficial. PCP finance can negate a long-term financial burden while granting motorists the opportunity to drive cars they wouldn’t be able to afford outright. You also needn’t worry about depreciation as you won’t actually own the car.
Are there any drawbacks to PCP
Though it has many benefits, PCP finance also has some drawbacks. Firstly, while not owning the car will have some advantages, the contract may also restrict you from what you can do with it. You may have a mileage allowance and likely to incur a charge should you go over your limit.
Finance contracts can be flexible, but some will charge you for an early cancellation, along with a pretty hefty balloon payment if you finish your agreement and want to buy the car.
PCP deals
There are thousands of PCP deals out there from manufacturers, dealer groups, and independents. Below, we’ve covered the hard yards and brought you the best manufacturer-backed PCP deals for different price brackets.
Advantages and disadvantages of PCP car finance
Pros
• Lower monthly repayments than HP
• Protected against depreciation because if the car’s value falls quicker than expected, it can just be handed back at the end of the contract
• Widely available with 0% APR deals
Cons
• Need to save up for the balloon payment if you want to buy the car
• Mileage limits
• Damage fees
• Early cancellation can be costly
Alternative types of car finance
Hire Purchase
Hire purchase is the simplest type of car finance to explain. You split the cost of a car into a deposit and a series of monthly payments. Once you’ve paid the final instalment, the car is yours, subject to any further fees the finance company may charge.
Leasing
Personal Contract Hire (PCH) or leasing is essentially like long-term renting. Like with PCP, you need to choose a contract length and mileage limit. But unlike with PCP, you have no option to buy the car.
Personal loan
Personal loans essentially let you buy a car with cash. You own the car from the start, and you don’t need to put down a deposit.
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